Indian companies are beginning to embrace green finance to fund environmentally friendly projects, as they heed calls from Prime Minister Narendra Modi to boost renewable energy in one of the world’s worst polluting nations and tap rising investor demand.

IDBI BankBSE 1.62 % became the first state-run commercial lender this week to line up global investors for green bonds – which are certified to show that funds raised will be used for environmental projects – in a $350-million issue that got orders worth about $1 billion.

The issue, coming days before the start of U.N. Climate Change talks in Paris on Nov. 30, is another sign that for Asian companies the benefits of diversification and positive branding that green financial instruments bring outweigh the higher costs they have to pay to investors who buy the bonds.

“There has been this extraordinary policy push in India.(State companies) have taken up Prime Minister Modi’s mission to grow clean energy and green infrastructure,” said Sean Kidney of the London-based Climate Bond Initiative (CBI), an organization that promotes environmental finance.

India is the world’s third-largest individual greenhouse gas emitter, behind China and the United States, according to the U.S. Environmental Protection Agency. It is seeking investments of $100 billion over seven years to boost its solar energy capacity by 33 times to 100,000 megawatts.

Modi has made renewable energy a priority for his government, as he looks to leverage the falling cost of solar power – expected to reach parity with conventional energy by 2017 – and address India’s chronic power shortages.

Globally, a record $38.4 billion of green bonds have been issued so far this year to finance low-carbon transport and other environmentally friendly projects, according to the CBI. That is more than three times the $11 billion issued in 2013, it said.

Demand for such bonds is growing, with many pension funds and money managers in the West mandated to invest in socially responsible and environmentally friendly assets.

In Asia, issuers have generally shied away from them due to the absence of a natural investor base for such products and because they cost more than a traditional bond.

That could be changing – the IDBI deal saw four-fifths of the order book emerge from Asia.

But the additional costs and the absence of standardisation of such investments can limit their potential growth, some analysts said. “There are currently no standardized criteria for what makes a bond ‘green’ and no strict requirements for tracking or reporting on proceeds,” KPMG said in a report earlier this year.

IDBI’s funding follows that of the Export-Import Bank of India, which in March issued a $500 million green bond, the first for an Indian issuer in U.S. dollars.

Private-sector lender Yes Bank and the Indian arm of Hong Kong-listed utility CLP Group have already raised financing via green bonds in the local market.

More state-owned Indian firms could follow. NTPCBSE 0.00 % Ltd, which produces a quarter of the country’s electricity and plans to commission more than 11,500 MW of renewable energy by 2032, could be a candidate, said CBI’s Kidney.

“Looking ahead, we expect strong growth in green bond issuance from Indian entities, as the central government looks to renewable energy as a means to help plug the country’s perennial power deficits,” Moody’s said in a report.